Episode 45: Surface, Subsurface, and Mineral Rights Explained | Guest Diane Buhl
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Welcome to the REALTORS® Land Institute Podcast, the Voice of land, the industry's leading land real estate organization.
Justin Osborn: This is Justin Osborn, Accredited Land Consultant with the Wells Group in Durango, Colorado. On today's episode of the Voices of Land Podcast, we're talking to RLI member and mineral rights expert, Diane Buhl, with Keller Williams Realty out of Austin, Texas. With over 20 years of expertise in the real estate industry, Diane specializes in land development. She has extensive experience with surface, subsurface and mineral rights usage agreements, easements, leases, royalty interest and environmental stewardship. She effectively navigates complex regulatory restrictions and new development guidelines while collaborating seamlessly with parties holding various rights. Currently she is pursuing a Juris Doctor in Environmental Law. Welcome to the podcast, Diane.
Diane Buhl: Hi. Thank you, Justin. I appreciate that wonderful intro and being on today.
JO: Yeah, I'm excited to do this and I'll let you educate me. First off showing here a little naiveness with, what is Juris Doctor in Environmental Law mean?
DB: So it's that fancy word of, it's an attorney or a lawyer. So I'm going to pursue my law degree in Environmental Law and hopefully increase the knowledge for my clients and for my community and just a passion I've decided that someday, you know, I will be, I'll graduate. I might be like 90, but I think I'll make it. [laughter]
JO: All right. Well, good. I'm a big fan of continuing education, so props to learning something new. That's awesome.
DB: Thank you. I'm looking forward to it. It's hard work, but I enjoy it. And so here I am.
JO: Well, good. Well, you know, we've got a lot of uneducated listeners here that have, you know, just trying to get more familiar with the land market, and so why don't you give us like the first kind of 30,000 foot view of mineral rights versus surface rights for those that may not be familiar with those two terms?
DB: Yes, that's a great start. So mineral rights refers to the rights to extract and use the minerals located beneath the surface of your property. So these can include the right to extract the resources. So an owner of mineral rights has the legal authority to explore, extract and sell their mineral rights located underground. So this could include things such as oil, natural gas, coal, metals, rock, water, and other geological materials. They have also the right for severance of those, meaning that you can take the surface rights and somebody can own those, and then somebody can own the subsurface rights. So we can split those and this situation allows for the different interests of the property to the best and highest use stuff of the property for the most part. And lastly, there's the right of lease and royalties, obviously getting some compensation for the mineral rights.
DB: That's always a good thing, that this can come in any form of a lump sum payment or over a period of time depending on volume or value of the extract resources. So that's a mineral right. As far as surface rights, surface rights then refers to the right of use or occupying the surface of the property. So that's gonna be usage of the land. So owners of the surface rights have the right to build structures, farm the land, conduct business and use the surface for recreational purposes. I know Justin, you enjoy hunting, so that's a, you use your surface a lot for that right. And so these allow for management and control of the surface and then also for water and vegetation and farming and construction. With that, there are limitations on the surface rights as well. So you're gonna have rights that are subject to local regulations, maybe zoning laws, particular easements or might be in a place of limitations of how the land can actually be used. So that's the overall, you know, 3000 view of the difference between. So as you can see as we get started, there's a big difference.
JO: Yeah, there definitely is. And, you know, you hit on a couple things there that I wanna circle back to. Where I'm at, I'm in southwest Colorado, and so most of the farms and ranches that were selling the mineral rights were severed back in the '40s and '50s, I should say 1940s, 1950s. So it's really unusual unless I've got a client buying a fourth or fifth generation farm to get any of those mineral rights. And they seem, a lot of 'em have a hard time with that. You know, the locals kind of understand it is what it is. But because they were severed so long ago, we often have a hard time with the tourists that come here understanding that, yeah, that natural gas well you are seeing out there, you know, it looks like an oil derrick in Texas, but we have to educate 'em that, no, that's natural gas, and no, you don't get the royalties from that, it's going to some entity in Texas or Oklahoma or wherever, but what you do get is the benefit of that gas company keeping the road open onto your property.
JO: They have to make sure they can maintain that well when there's a heavy snowstorm. And so it's not always the negative that some people think it is. You know, you mentioned my passion for hunting, and yeah, you're spot on there and, you know, a lot of times the pipelines that are running through these ranches, you know, if we've got Ponderosa pines and Gambel oak covering the property, that's really hard to get some vegetation to grow under, the wildlife likes to feed on those pipelines where that grass is. And so it's not all the negatives that some people think it is if they're not getting the royalties from that. There's a big recreational outdoor component that I personally see on some of these properties that have the natural gas wells on 'em.
DB: And that's a very good point, and you're right, it's, for here in Texas, our rights have always been the right to possess and sever them at whatever time possible, depending on the owner. So ours goes back to the early 1800s and when they started to really be, have the ability to sever the rights. And with that, to your point, they either did it for recreational, they did it for mining, they did it for collaboration, primarily for water. Obviously in Texas, we have our water and always have had our water as priority. So to your point, you see it on your end in Colorado, and we see it here in Texas differently. So when we see severed rights of mineral rights, even then it's very complex because the land owners, even if they buy or sell it, they're, they think, well, I might be able to get 100% of the minerals.
DB: And that's not necessarily true. There's gonna be probably several different components. You could have a water lease that was put on the property from 10 years ago. Then you can have oil and gas, you can have rock. And so there's all those different minerals that allow for the highest best, but that person who's buying the surface rights may not have all of that capability to own or even benefit. To your point about the royalties, they may not get those, but they still need the surface rights, at some points they do not have the road structure though, like you're talking about, we don't have a lot of snow, but a big thing is our utilities, meaning electricity, that we are able to get to some of these rural properties to that level that allows that surface ability use with the mineral, royalties and companies and entities that use subsurface materials and resources.
JO: You know, that's a great point there about utilities. You just triggered something in my mind where I had a property that was on the Florida River, you know, Southwest Colorado. Anasazi term spelled like Florida, but pronounced Florida. So don't let that confuse you, but we had a gas well, natural gas well on that, and it had some challenging access. The utilities were a long ways away. But my buyers were able to get permission from the local electric company to pull electric to their home site off of the electric that was at the gas well, and that saved over probably half mile, no, three quarters of a mile of electricity for pulling that. So, you know, I didn't even think about that till you mentioned that.
DB: Yeah, utilities is a big one regarding the surface and the subsurface kind of joining together, merging the value add for the property, 'cause those all, as you know, it costs, and I'm sure for that particular property that you had, the amount of money to dredge for if they can do either overhead or if it's underground requirement for that. So that can cost a lot. And so we try to look at, when I talk to property owners about, if they're upset, well, why do I have 12 different leases on this land? I really want it for X development. And it kind of bothers them, but I said, "Well, ultimately it's to merge the benefit of they have infrastructure there that they've already put in place." So you're not losing in the cost of that. You know, you gotta think about that. Of course, if your goal is to develop for, let's just say a commercial property, it's gonna look different than residential. So we just need to make sure that our rights on the surface are in conjunction with these leases and what those actually, those terms look like and if it's doable because of whatever material resource is being taken subsurface, if it's in compliance with where we're at. So yeah, utilities is a big deal.
JO: Well, you mentioned value add, and let's circle back to that because, you know, I deal with mineral rights and it's pretty easy for me to say, "Okay, I know I've got an investor that'll play, he'll pay X amount of dollars based on his multiplier in his mind for what the royalties are worth." But then I've also got a lot of clients on the seller side that say, "Okay, Justin, we want you to list our ranch." And I come in and I tell 'em, "All right, here's what it's worth. It's gonna sell in this range." And then they say, "Well, does the fact that we own our mineral rights change that?" And I say, "Well, yeah. Are are you getting any income from those mineral rights?" "Well, no, we're not getting any income, but we own 'em." It's like, well, that's speculative, you know, I can't put a value and I can't justify a buyer paying a significant amount of more money. Maybe they'll pay a little bit more money just for that same speculation, but I'll have sellers that'll want me to increase the price of my listings by hundreds of thousands of dollars, if not millions, because they think there might be a mineral play 50 years down the road. How would you respond to that?
DB: Yeah, that's a, it is a tough one. I agree. And the reality of it is, you know, I like to explain to those particular clients who do believe that they have the value of them because they have the rights to them. Unfortunately, that's not the reality of it, right? As you say, see yourself, we do a lot on our team. We have a big, huge network of our systems that is our due diligence. And so I bring that back as value to my clients that, let me do my depth of research and bring value, and I actually partner up with different lawyers and mineral valuation companies to give them that scope. And that's part of our team's goal is to bring that to the clients when they do have that kind of thought process is, well, this is what I want.
DB: And we really need to kind of pick apart all of that in our due diligence process to show them what it actually means. And to the point that we all know is, just because you have something doesn't mean that somebody's gonna be willing to give you what you think the value is. It's kind of like anything else, what's the market value? And so we also have to make sure that subsurface resource is something that is valuable in this marketplace. If it's not, that's a ticker on it, like, well, okay, that one didn't work out, let's go down the next line. Okay, how much of this resource do you have? Okay, do we mark that one off? So there's, again, a process that goes along with that, that we have to educate our sellers on that when we go through the process of them, you know, believing I have the right so I should be able to get as much money as I can for it. It doesn't, unfortunately doesn't work that way.
JO: Yeah. And a lot of them don't have the money, it seems like, to do those studies. I mean, I've got a lot of clients that are real estate rich, cash poor. I mean, where are we at today is Thursday, so it was Monday I was talking to some clients that owned a few hundred acres here, and they're convinced that there's a huge gravel play there and they're probably right. I said, "Well, okay, I can get my geotech engineers out there, we can do some studies." Well, how much is that gonna cost? It's like, "Well, I don't know. We're gonna have to get them out there to take a few samples and get some quotes." But, you know, they're so real estate rich and cash poor that they don't have the money there to pay for that, even though they realize this could be a difference of millions of dollars I can get for your property when we're talking about 300 acres that could be full of gravel. And so it's trying to have those conversations and educations to say, "Okay, maybe we bring an investor that says he'll pay for the study and he'll be able to get a piece of the pie." And so it's trying to think creatively on how to get these things done.
DB: Yeah. To your point, now, in Colorado, do you have... In Texas a lot of, you know, our large ranches and our land has been passed on through generational, right? We still see a lot of that. And so when we have have a new seller or client that wants to be able to sever these subsurface rights, we have a huge, you know, we have to go through the process of entitlement and specialized on that. And sometimes a landman can find out certain things too, which is basically a land agent that goes through the title and is a historian in my eyes, because you have to, there's so much to go through. But the reality of kind of bringing it back to strategizing for that land is, you know, your family might have had a goal back in, you know, when they obtained the property 60, a hundred years ago, and now it looks different.
DB: And so, like I try to tell my clients who now after generational having this property is, you are gonna have, you may think you own some of these rights, but then there's still some components of all the regulation that come on top of certain things that back in the day didn't exist, right? So, oh, and I find that interesting as we get into this in Austin, we're developing a lot more. We've got, our population grew so much, especially in central Texas. So we're having these conversations and it's important to know where your client wants to strategize their parcel and what does that look like as far as the obligations and conditions as they go through the process of selling their land and severing their rights or keeping them if they want to, and just selling off the surface versus the subsurface of resources.
JO: Yeah. And where I'm at, it's so diverse just based on kind of within [0:16:30.2] ____ radius. So, I'm in Southwest Colorado. We're very close to New Mexico to what's called the Fruitland Outcrop, where there is a huge significant supply of natural gas. And then if you just go West of where I'm at in Durango over towards Dolores, Colorado, you pass a little town called Hesperus, and there, there was a big coal mine, and they're doing some studies for, I guess you'd call it coal exploration, seeing if they can get some more. And then you just go North, you know, what, 35, 40 miles as a crow flies to Silverton, Colorado, and there's a reason it's called Silverton. You know, back in the 1800s there was a huge silver play up there. And so there's just kind of this pocket where I live of gold, silver, natural gas, coal that kind of attracts people here, but it's very, you know, just like it was 150 years ago, it's a very risky play, especially when you're spending $10,000, $12,000, $15,000 an acre for the land in hopes that you might hit something.
DB: That's a really good point, and brings up to another part of, and I'll bring it back to where the sellers in the reality, you know, they, some clients might feel, well, this is what I believe my value of my resources might be, but it's all about location and how some areas it seems like there is a great abundance of something until you get underneath and you start investigating that there really isn't an abundance because over the longevity of other parcels and technologies being able to utilize the horizontal drilling and factors that way, it is not as valuable. So we really have to bring back what the added restrictions again might come up, and the location, what one might have thought back in the day would work is not necessarily true on that, plus the cost of if finding out whether or not the production is as good. And that's where we see right now a lot of exploration contracts. You'll see that in from these, the companies who are interested in investing in it, they'll be contracts that are typically about one year long, and that allows them to provide a lump sum to the surface owner and mineral owner to explore and figure out if there is truly a value.
DB: And then those contracts can renew and there's negotiation terms within 'em, or they can expire and then another company might come along and with their resources try. So we see a lot of that as well in certain areas that the location used to be very abundant with a certain resource, and then over time, as things kind of shift around and things happen underneath the earth, you might see some of these companies come back around, exploration companies come back around and drilling to wanna see if there is anything. So I do work with a lot of clients who go, "I got presented with a company who wants to explore, what does that even mean?" And so we'll go through those contracts and make sure that the exploration still is not gonna affect other aspects of other subsurface resources or the surface resources. So again, when you're presented with an offer, in my experience that it's very, you have to read those contracts and there's verbiage in them that will surprise clients who just don't know, because unfortunately it's verbiage that's been drawn up for the benefit of the company, or the exploration that wants to do the drilling or exploring for that resources. So I'm always very cautiously saying, make sure you know what you're signing. [chuckle]
JO: Yeah, it's definitely almost always to the company's best interest. If it sounds like it's too good of a deal to be true, it probably is. We obviously have a lot of realtors listening, so what advice would you give to those agents that are out there and they're just getting started in land or maybe they're just getting started in selling land with mineral rights? Let's talk about maybe some of the common pitfalls or the best practices that they should be aware of.
DB: That's a great question. So I think the key factor here is always that a realtor should advise their client to seek legal advice, right? It's a scope that is very vast in contractual agreements, in terms that those are things that are outside of, you know, stay in your lane. If that's not your lane, it's most appropriate for a good relationship with our clients is to be very transparent, "Hey, I just don't know this, but I do know somebody who can help you." I think just being that resource, number one, as to having a partnership with lawyers who specialize in subsurface resource is... Subsurface rights is something you really need to have on your team if you decide to work in this scope of a specialty. Additionally, having title companies that you work with that also specialize in exploration and contractual mineral rights, and, because some title companies are not... They're specific for residential, but having an in-depth title company, and typically they also have resources and legal counsel for subsurface mineral rights and contractual agreements and how to do the, how to either formulate a contract for that or interpretate them. We've done one right now where I have four lawyers I'm working on for one contract, all the way down to a lawyer for, specializes in just groundwater and a lease on that. So it can be very specific to the kind of mineral that you're pulling out.
DB: This helps confirm just for everybody's, you know, the transaction is gonna be, number one, smoothly, and there's transparency on what is actually happening underneath the surface versus on the surface. Also this can help in your sales price and the usage of the land and the restrictions for the seller. So ultimately, yes, I know we have clients that go, "I don't wanna spend that kind of money. That sounds like a lot of money going out before we even get anywhere." I get that, but... So my job on our team is to typically merge those and we have partnerships because we specialize in this area. We help those clients make it make sense for them, by partnering with lawyers, title companies, landman and utility access our systems on our backend. We spend a lot of our own resources to make sure that we provide some in-depth mapping systems prior to it even having to go to lawyers.
JO: Yeah, it's crazy what you can learn just from looking at the mapping system. I mean, Land ID has some great technology out there right now where you can do some mineral right overlays, and listeners, you should definitely be checking that stuff out. Now, I wanna circle back to something you said, Diane. You said it twice in this podcast and I know what you're talking about, but I'm afraid a lot of people might not, and that is the term landman.
DB: Yes.
JO: So a landman is, if you think of like a title examiner for a real estate contract, a landman is somebody that goes in and basically does the mineral right search all the way back to the beginning of time as far back as the records go. And it's often not very easy. It's not as simple as, "Okay, let's go to the county courthouse like the title examiner can do." Sorry, I'm showing my age now. We don't [0:24:51.7] ____ county courthouse anymore.
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JO: They get online and pull the county records, but when researching mineral rights, it is way more complicated than that. And so, like Diane said, you should definitely make sure you've got a specialist, you've got a professional that knows what they're doing. And that could be as simple as reaching out to a fellow RLI member. I'm willing to bet if they've got an ALC after their name and they live anywhere where there's mineral right activity, that's gonna be a good starting point for you. You can also go check out the RLI website and we've got the Find-a-Land consultant tool on the RLI land website and you can find some specialists that can help you with this topic.
DB: That's wonderful. I do love the resources that we're able, technology has definitely helped us out in this realm. So, to your point, finding an accredited land consultant is extremely beneficial. And this is what we love to do. And here we are. I hope people at least have gained some insight on the vast amount of ways that, number one, subsurface and surface rights can be severed and what that looks like and the complexity of it is a big deal. So it's something that if you wanna have the longevity of your clients and the trust, is educate yourself. I think, back to your point, Justin, is like, what can a real estate agent do? Is make sure you're educating yourself on these different topics that we've just disclosed. And then also being transparent with your clients that, "Hey, if I don't know, I'll find somebody for you." And again, an ALC is where you've got to go. [chuckle]
JO: Well, talking about getting educated, I've been in the business now, I think this is year 23 or 24 for me, and I just recently learned that you can 1031 out of real estate into mineral rights and this all came about is 'cause I had a client in Durango that owned a few duplexes and triplexes and they were just so sick and tired of dealing with tenants and they said, "You know what? It's just not worth it anymore. We're constantly getting phone calls from the property manager that, "Oh, we had to replace the water heater and then we had to replace the dishwasher and this roof is now leaking." And they said, "We're done with it. What other options are out there?" And it was actually through RLI and listening to another podcast from one of our other affiliates where I learned about 1031-ing out of real estate into mineral rights. And, I mean, we don't have a lot of time, but is that something you can talk on real quick?
DB: Yeah, real quick. So we do see quite, especially as we have a market shift change, I do see this quite often in that. Again, it's both because partnerships on the real estate end have shifted, money is not as easy obtained from the banks. They wanna go into a steady stream or royalty aspect, which is, that is its own beast and it actually makes me really smile because real estate is so vast and where you can put your money, it's really interesting. But we are starting to see a lot of that and it usually happens when we see shifts in markets where people go, "I need a little bit more stability." Now, it's not like we're back in the olden days, [chuckle]] getting gold, changing out that, but it's somewhat close. I mean, we have water lease. I'm working on one right now with... Which is buying mineral rights for water, groundwater, which is very interesting because that's a whole other dynamic. But, yes, that's... 1031s are happening.
JO: Well, there we go. Well, maybe we'll have to do another podcast and talk more about that. And I got to tell you, I love geeking out. There's not too many people that'll get excited at 7:30 in the morning about smiling about 1031 exchanges and mineral rights.
DB: I know. Well, we got up and did this and I love it and I know y'all do too. So that's right, we make a great team and hopefully we gave some good nuggets for people to kind of feel that they can either look a little bit more into the Realtor Land Institute for some educational resources. Obviously if anybody wants to ever reach out to me, I'm available on pretty much any social platform. And our website is www.texasfusion.com or you can just search Diane Buhl. So it's been fun, Justin. Thank you so much for today. I appreciate your time and just laughing, like you said, early in the morning. [chuckle] It's a good start for the day.
JO: Well, no problem. And yeah, happy to do it. We got a couple more little few nuggets here for our listeners that, if you're thinking about you wanna be an expert in land and be one of the best in the business like Diane here, consider earning your ALC. We've got land due courses that will build your competency and your confidence when you're conducting land transactions. And you'll earn credit towards the education requirements for the ALC designation. You can see those upcoming course offerings on our Learn Tab on the RLI website, which is rliland.com. Well, Diane, thank you for joining us today. Hope everybody took down some notes there and got your plug on where your website is, where they can find you. And everybody remember, for more expertise on land real estate topics, be sure to check out the RLI blog, follow us on social media, and of course, tune in for the upcoming episodes of the Voices of Land Podcast.
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